Indian rupee to face higher volatility in 2014: HSBC

This year is likely to be “no easier” than 2013 for most Asian currencies including the Indian rupee and they will be exposed to periods of higher volatility, an HSBC report said Wednesday.

Many Asian currencies were stuck in a rut in last year, and this will likely be the case in 2014, according to the global brokerage major.

“We see the renminbi (RMB), South Korean won (KRW) and New Taiwan dollar (TWD) riding out the storm better than the rest,” HSBC said, adding that “we believe the Indian rupee (INR), Indonesian rupiah (IDR), Thai baht (THB) and Malaysian ringgit (MYR) will under-perform the region but to different degrees”.

INR has staged an impressive turnaround from its all time low level of 68.80 on August 28 largely driven by a slew of emergency measures and the tightening of monetary policy. These measures helped to narrow the current account deficit and boost forex reserves.

The rupee is currently hovering around 62/US dollar.

RelatedPosts

The policy rate was hiked by 50bps between July 30 and September 20. Besides, RBI was quick to unveil a slew of measures, including import restrictions and swap windows for onshore oil importers, to ease USD demand.

Moreover, India’s trade deficit has narrowed quickly and the outlook for the Current Account Deficit is improving.

HSBC however cautioned that “while the INR may have passed the worst”, the nature of the capital account is still very portfolio flow dependent. So, it will remain sensitive to sudden changes in broad risk dynamics.

“Despite a better INR performance in recent months, the currency remains challenged by a weak external balance and a capital account that is sensitive to broader risk appetite,” the HSBC note added.

It also said that the reserves data show that RBI has built up forex reserves by USD 20 billion since September but a bigger buffer would helpful to mitigate aggressive depreciation pressures on the currency.

Meanwhile, India’s political cycle is heating up with the national parliamentary election to be held before May and the best outcome for the rupee would be one with less political fragmentation that could give a platform to introduce reforms, HSBC said.